With income tax rate hikes currently “off the menu”, Rachel Reeves is reportedly preparing a variety of “bite-sized” tax adjustments to help balance the nation’s finances, raising key questions about what specific measures will be included in the Chancellor’s upcoming “smorgasbord” budget and the overall scale of these changes, stated RSM UK.
Although a few significant tax-raising measures—such as extending fiscal drag, council tax surcharges, and restrictions to salary sacrifice on pensions—are anticipated, it is likely that numerous smaller announcements will still be required to address a budget shortfall of approximately £10 to £15bn.
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RSM UK has listed out some potential measures and the estimated annual revenues these could raise. Among these include reforming the dividend tax by increasing the basic rate from 8.75% to up to 16.5%, which could generate £1.5bn.
Introducing a £100k lifetime cap on Individual Savings Account (ISA) contributions may add £1bn to government revenues.
Other measures include inheritance tax (IHT) reforms by extending the potentially exempt transfer (PET) period from seven to ten years, which could raise about £400m; abolishing the residence nil rate band which could raise an estimated annual revenue of £2.2bn.
The combined total of other potential measures could raise an estimated annual revenue of about £13.5bn.
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By GlobalDataRSM UK chief economist Thomas Pugh said: “It’s not just the size of the tax rises that matters, which taxes are raised also matters. Compared with simply increasing income tax, the “smorgasbord” board approach raises a number of risks.
“It is difficult to be sure how much revenue will be raised through smaller taxes as behavioural changes can be much more significant than with taxes like VAT or income tax. Not only does this reduce the credibility of the budget, as markets can be less sure of revenue estimates, but it also increases the chances of distortionary behavioural changes that damage employment, investment and growth.
“It also decreases the chances that the budget will be deflationary. Increases in duties and employer taxes, for example, will keep inflation higher for longer and give the Bank of England fewer reasons to cut interest rates.
“Similarly, if much of the fiscal tightening relies on fiscal drag and threshold freezes, instead of raising tax rates, then the impact on the economy will be delayed. This will save some of the pain next year, but it will make the budget less credible and lessens the chances of more rate cuts next year.
“The smorgasbord approach sends a signal to financial markets that the government is putting politics ahead of economics, which isn’t a recipe for building credibility and bringing down borrowing costs.”
Pugh argues that the smorgasbord approach is less credible, more likely to distort the economy, and almost certainly more inflationary than alternative strategies, thereby diminishing the likelihood of further interest rate cuts next year and raising the risk of avoidable economic harm.
RSM UK tax partner Chris Etherington said: “The clear and present danger presented by the “smorgasbord” approach is not just political, with the inevitable dismay the various measures may bring, particularly proportionate to the tax revenue they could raise. There is also the risk the strategy does not raise the hoped-for revenues, possibly due to behavioural response, potentially leading the government to come back for further, more certain, tax rises in the future.”
